Fixed premium participating whole life insurance is a form of permanent life insurance that has been used throughout the world. This form of permanent life insurance involves the policyholder paying to the insurance company fixed premiums in exchange for life insurance and the potential for dividends. As per its terms, the insurance policy may develop cash values, which are available to the policyholder. Should the policyholder wish to terminate the policy when the policy has cash value, this cash value is returned to the policyholder. Before accumulation of cash value in a policy, a termination of the policy results in no cash value return to the policyholder. After cash value has accumulated, the policyholder may receive part of the cash value through a policy loan while keeping the insurance coverage in force.
The cash value of the policy can also be used by the policyholder as the collateral for a policy loan. A policy loan reduces the net policy value provided by the policy in terms of both net death benefit and net cash value. At policy termination, either through death or surrender, the policy loan is deducted from the death benefit or calculated policy cash value. This policy loan feature also provides the policyholder with flexibility to take a loan against existing cash value. In addition to using the policy loan for anything that the policyholder desires, the loan proceeds can be used to pay a currently due fixed premium. When the policyholder is able to pay back the policy loan, the total cash value of the policy is restored.
As noted above, a fixed premium participating whole life insurance policy provides the policyholder with some degree of flexibility in payment of the fixed premiums once the policy develops cash value. However, prior to the point of the policy developing cash value, the policy of a policyholder who cannot make the required fixed premiums within the grace period of the policy would lapse.
During difficult economic times and hardships, life insurance policyholders may be faced with difficult decisions regarding the expenditure of money. In some circumstances, policyholders may be forced to skip paying premiums for their life insurance policy in order to pay for essential life needs. As noted above, this payment skip typically results in the lapsing of life insurance coverage. Thus, there is a need to accommodate such policyholders to allow them to keep their policies alive in some manner.
Some insurance companies have historically implemented no-lapse guarantees in various manners for flexible premium life insurance. Two types of no-lapse guarantees generally found in the life insurance industry today include alternative specified premium and shadow account. The purpose of these no-lapse guarantee features is to keep the policy in force if there is insufficient account value. The alternative specified premium or shadow account will keep the coverage in force if conditions are met and the account value is insufficient.